First, you start with a quote like this one:
Subscription services will replace the entire music purchasing experience. (David Goldberg, Vice-President and General Manager, Yahoo! Music)
Then you invent someone on the verge of a momentous decision. I like to put this someone in a midtown office staring out at the autumnal rain. This is called “atmosphere.
Craig Norton was sitting in his midtown office staring out at the autumnal rain. He put down his BusinessWeek and thought hard. If what Goldberg said was true, Craig might as well close up shop right now. As the CEO of Bang the Drum Music and the man responsible for a website that sells music online. The motto: “a little like iTunes only totally better.
Here we insert 800 very carefully chosen words on the music industry and sales in the second half of the 20th century, the rise of the internet as a new channel for music sales, the effects of Napster and Kazaa on the industry, and the introduction of the on-line purchase opportunity, from Apple and its competitors and then the rise of the subscription model from the likes of RealNetworks, AOL, Napster, and, as of May 10, Yahoo! Music.
We want to make the case a welter of data and interpretive possibility. We are setting the foundations for 80 minutes of classroom discussion. We want enough intellectual “noise to jam the navigational equipment of the mass of the class but not so much that the gifted students cant fight their way through. Its a sweet spot calculation: enough noise to baffle everyone for about an hour, not so much as to leave all of them baffled at the 81 minute mark. If we do our job, a certain clarity should be emerging around the 65 minute mark. Revelation should arrive with the punctuality of the New Haven express at the 72 minute mark. This leaves 8 minutes to clue the other kids in.
Yada. Yada. Yada. [Consider the 800 words written. You know what to do.]
For conventional business issues, the task is straight forward. We salt the case with the key figures, findings and observations that make it possible for discussion to ensue, controversy to break out, camps to form, wits to exercise and sharpen, and then, at the 72 minute mark, to have one of the bright ones put everything together, and come thundering out of our carefully created haze to “crack the case.
But the case I am thinking of here is not a conventional one. Certainly, Craig Norton has a real problem. I think he also has a real opportunity. The glib thing to do here, and this will tempt the less gifted students in the class, is to say, “Craig, buddy, make the move, change the model, go with subscription. These kids will bite on the Goldberg remark and never look back. This is good for the class to have some kids setting up a position.
But the smart ones will say, “no, this is too easy. At the very least, they will know the genre well enough to know that no one gives away the secret in the opening lines.
The trick is to give students something with which to work. Because this blog sits at the intersection of anthropology and economics, I am interested in how cultural considerations might argue against Goldbergs advice and encourage Norton to hold his position. (In my little universe, this is the answer that cracks the case. It may be wrong, but then the point of the case study is not to promote inevitable truths, but teach people how to see past the obvious.) Heres what we have in the case (sounding suspiciously like a passage from BrandWeek [which it is, as below]).
The online providers typically pay the music labels about $6 per person a month for a subscription that allows users to listen to music only on their PCs. The service in turn typically charges users $10 a month. After expenses such as the cost of server infrastructure and credit-card fees, that leaves a profit market of about 30%.
However, for subscriptions that allow downloads to portable playerswhich most people are likely to wantthe fee to the label increases to about $8. Thats why RealNetworks and Napster charged $15 per month before Yahoo came in with its $7 offer.
Someone, Mr. Gates, lets call him, will notice that Yahoo is going to have to go back to the consumer, rescind the $7.00 price, and go higher. The business model cannot be sustained. Yahoos price of $7.00 was introductory.
Someone will counter that Yahoo might have enough clout to force the music labels to drop their fees. But we have anticipated them in the case.
Many music execs believe Yahoo is charging too little and could get consumers hooked on unsustainably low prices. “The labels are very sensitive to the devaluation of music, says RealNetworks chief strategy officer, Richard Walpert.
And sure enough someone will read this passage out, and the counter is challenged. Yahoo cannot hope that industry accommodation will bail them out and the class will see this. But we have something useful on the table and this is our opportunity to open a path for the class.
“So Mr. Gates, is this a problem? People change their prices all the time.
“Well, I think if you bring in people at one price and then charge them another, they have a right to be angry.
“Angry enough to do something about it?
The HBS drill is clear. An instructor may never lecture or lead the class. As Ben Shapiro used to say, what happens in the classroom belongs to the section. If the students dont crack the case, they dont crack the case. Their loss. But the instructor may ask the difficult question, forcing the student to revise the assumptions with which they construct their original positions.
“Ms. Lumin, what do you think? Will subscribers leave Yahoo because of a little price change?
If things go well, it should be possible to draw out two larger issues that must be answered to decide whether Goldberg is right and what Norton should do. The first of these is the special relationship between the consumer and music. Music is formative of who the consumer is and the very values and objectives that define as them as people and consumers. Music takes on meaning from the life of the consumer and it gives off meaning in the life of the consumer. A special bond is formed. (This is very hard to get into the case, but it should be a clear and retrievable fact in the experience of most of the students.)
As this approach draws out, a new conclusion emerges. The instructor may wish to beard the class in the following way.
“So you are telling me that consumer really care about their music. And I guess this means that they should be prepared to pay more for it, no? A pricing increase should be ok.
Again, the less gifted students will go for this, but the brighter ones will remain impatient. And now we are forcing them down into still deeper assumptions about the case and a still deeper knowledge of their culture. Eventually someone will say,
“Look, there is this special connection between the music and the consumer, and this means they will resent a change in pricing.
“Tell me why.
“Well, um, because you are holding their music hostage. You are taking advantage of the fact that theyre connected to it. This connection means they have no choice but to pay you.
“And thats a problem why?
“Because you are exploiting their dependency and no one likes having no choice. This really is taking advantage.
The smart ones will keep digging.
“It kind of stops being a contract when one party has no choice but to continuing to pay whatever the service charges. This is almost like slavery, isnt it? The subscription model actually incents the consumer to leave the supplier…just to punish them for their temerity. I think people will want to buy, not rent because it protects them from this vulnerability. More than that, they will be incented to move from renting to buying to punish the company that exploited their connection to their music.
If we are really lucky someone will recall the moment when the CEO of the Coca-Cola Company suggested that Coke machines would use variable pricing technology to charge more when it was really hot out. After all, his logic went, Coke was creating more value, it should harvest more value. This was one of several reasons why the CEO was removed from office. Pricing that takes advantage of the consumer does generate revenue but it also does great damage to the brand in the process.
Burrows, Peter, Ben Elgin, Ronald Grover, Jay Greene, Heather Green and Tom Lowry. 2005. Online Music: Rewriting the Score. BusinessWeek. May30, 2005, pp. 34-35. (NB: two passages from the “case [specifically paragraphs 12, 13 and 16] are drawn from the BusinessWeek article, for which acknowledgment and my thanks are here noted.)
The photo above shows C. Roland Christensen who was, for fifty years, a driving force behind the development of the case method.